Supply Factors and the Mid-Century Fall in the Skill Premium

Supply factors affecting the costs of obtaining schooling explain much the U-shaped trend in the skill premium in the U. S. across the twentieth century. Specifically, the direct costs fell dramatically in the early part of the century as a result of increased public funding and falling fertility rates during the high school movement. The foregone earning costs of schooling were also low for midcentury workers because of high youth unemployment during the Great Depression.This paper develops a model and uses historical data to incorporate these factors and examine their quantitative importance. The baseline model is able to explain about 40 percent of the mid-century decline — and alternative calibrations explain up to 71 percent — without any mid-century decline in the demand for skill. JEL Classifications : I2, J31, N32